Financial services, regulation and ethics

The focus of this chapter is on how ethics can be applied within financial services businesses in practice. It examines how core values and ethical issues are identified and how they are embedded into a value-led culture...

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...he focus of this chapter is on how ethics can be applied within financial services businesses in practice. It examines how core values and ethical issues are identified and how they are embedded into a value-led culture.

The commonly held definition of ethics is the values we hold to be ‘good’ or ‘right’. They are usually held to be universal and timeless and are different from morals, which are ‘attitudes’ and are usually considered to relate to a specific period in time and refer to contentious issues. It is because the law does not change as quickly as public thinking about what is acceptable, right or wrong behaviour that there is always a need to look beyond the law and develop codes of practice, or codes of ethics, and for those codes to be regularly reviewed.

Ethics is at the heart of financial services legislation because ethical behaviour:

Sustains honesty and integrity

Builds trust

Makes markets work more efficiently

Produces better outcomes for all

The FSMA and the FCA Handbook are based upon a series of core values, which can be summarised as:

Open, honest, responsive and accountable

Committed to acting competently, responsibly and reliably

Relating to treating colleagues and consumers fairly and with respect

These can be said to reflect the values of our society and the experiences of professional bodies and are put into practice through the legislative process.

The ethical values of an organisation should be owned by everyone working within it.

Ethics are often expressed and applied as principles and the FCA Principles for Businesses, the Code of Conduct (COCON) and Statements of Principle and Code of Practice for Approved Persons (APER) are founded on ethics.

The FCA operates on set principles that authorised firms must follow within their businesses. A firm that does not follow these principles and codes of practice may be subject to disciplinary action.

The FCA Principles for Businesses state that a firm must:

Conduct its business with integrity

Conduct its business with due skill, care and diligence

Take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems

Maintain adequate financial resources

Observe proper standards of market conduct

Pay due regard to the interests of its customers and treat them fairly

Pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading

Manage conflicts of interest fairly, both between itself and its customers and between a customer and another client

Take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely on its judgement

Arrange adequate protection for clients’ assets when it is responsible for them

Deal with its regulators in an open and co-operative way, and disclose to the FCA anything relating to the firm of which the FCA would reasonably expect notice

Act to deliver good outcomes for retail customers

The ter...

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...bsp;promises. This covers a range of areas from information given to a client about a product to the way in which a client’s data is handled. 

The regulator has intervened in the past to try to encourage firms to behave more ethically by influencing the composition of management (required functions), influencing the incentives for good behaviour, requiring firms to focus appropriately on risk-management activities, deterring unacceptable behaviour (withdrawal and varying of permissions) and influencing how staff are recruited and trained.

The regulator has identified four key components to a firm’s ethical culture:

Leadership – Leaders being clear about the types of behaviour expected from employees and demonstrating the same behaviours themselves

Practices - How individuals are recruited, rewarded and promoted must make it clear to others what is required of them to be successful

Narratives – Narratives that circulate the firm about what it is aiming to achieve and how, which are usually found in strategies, business plans and performance targets. How these are put across sets the expectations and influences the extent to which ethical behaviour can be upheld or compromised

Capabilities – How well a firm equips its staff to demonstrate the ethical behaviours expected of them. In other words, how well they are trained to carry out their role ethically

Whistleblowing

Speaking up about something suspicious or a matter of criminal wrongdoing is known as whistleblowing, the formal definition of which is ‘the raising of a concern, either within the workplace or externally, about a danger, risk, malpractice or wrongdoing that affects others’.

Whistleblowing can save lives, jobs, money and reputations. It alerts firms to problems and allows them to take action, hopefully before the consequences become too serious.

The whistleblower could be raising a concern about a dangerous activity, a serious risk to the business, malpractice in how an activity is being undertaken or wrongdoing in how the organisation is being run.

The whistleblower could be an employee, director or contractor, or a temporary or former worker. Many financial services firms are now subject to detailed regulations on whistleblowing, covering policies, procedures, reporting and oversight. Each such firm must appoint a whistleblower’s champion with overall responsibility for ensuring their firm’s compliance.

The FCA has established a whistleblowing team to receive reports from whistleblowers who are reluctant to report concerns with their own firm, so that they can report on a direct basis.

How has the FCA addressed the issue of individuals being reluctant to report concerns about danger, risk, malpractice or wrongdoing within a financial firm for fear of reprisals?

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To embed an ethical culture into an organisation, a firm requires a comprehensive and coherent framework which has the following elements:

Commitment (an ethics code or values statement)

Processes and structures to embed ethics

Methods of reviewing, measuring and evaluating ethics

Strong leadership from executives and managers

To achieve an overall level of professionalism, these need to operate across the entire industry. Each firm should have an ethical framework that mirrors its own approach to dealing with people and clients, whilst also providing the ethical culture for employees to work in line with. Firms do collaborate occasionally to raise ethical standards across their sector when deemed necessary.

A good example of collaboration is in the general insurance industry, in which firms commit to the Aldermanbury Declaration, a framework of professional standards largely based on conduct, knowledge and the achievement of appropriate qualifications.

Ethics code or values statement

Ethics codes set out a sector or firm’s commitment to ethical conduct at a high level and often have more specific details to govern specific responsibilities. They should set out realistic and practical standards and aims in relation to specific risks and circumstances of the business involved. The term 'values-led' culture indicates that the ethics are built into the firm’s business model.

Embedding ethics

There is a danger that a sector of the industry or specific firm will attempt to appear ethical without having the genuine values that underpin such behaviour. To fully embed a code of ethics, it needs to be practiced at every level of a business clearly and consistently. Ethics need to stand up under pressure and a continuous learning culture with a clear commitment to Continuous Professional Development (CPD) needs to be in place, which means staying aware of current issues and using ethical decision making strategies to develop solutions.

It is also important to be doing the right thing for the right reasons, not just to please the regulator or to avoid sanctions or fines. Ethics that are not embedded within the fabric of a firm – its employees – are short-lived and insincere.

Leadership on ethics

The values and behaviours of the senior management and board will play a significant part in setting and continually reinforcing the ethics of the business. By ‘walking the talk’, they can be visibly seen to believe in the ethics and shape the ethos of the firm.

Understand the...

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...ly situations they are more likely to be seen as valuable and worthwhile. . Below are example scenarios where the correct ethical action may not always be clear:

Example scenario 1

You work in the compliance department of a large firm. An anonymous tape is sent to you which appears to be a recording of a conversation between two other members of staff discussing the weakness in an area of the business and colluding to commit fraud.

Do you tell anyone?

Who do you tell?

How do you go about it?

Example scenario 2

A friend tells you that they have just obtained £4,000 of interest-free credit by getting a new credit card. To receive the interest-free element, a balance transfer should have taken place, but the member of the credit card company’s staff did not ask about it. Your friend has received the amount they asked for and intends to stop using the card after the interest-free period.

Do you consider taking advantage of the offer?

Are there any ethical issues or considerations involved?

Example scenario 3

You are asked by your manager to contact a local newspaper and provide them with information about the mis-selling practices of a competitor firm. You have a friend who works there and you know that the allegations of your manager are untrue.

What do you say to your boss?

If he is still insistent, what do you do?

These scenarios can be considered as discussion items to raise awareness of ethical behaviour and prompt the formulation of possible solutions.

Membership of a professional body puts firms under a duty to consider the wider public interest. This makes them more used to employing ethical standards and behaviour, and more likely to be familiar with the ethical challenges that face the industry. This leads to more input from those at the sharp end as to the changing ethical dilemmas that emerge and how customers expect firms to deal with them.

Managing ethical dilemmas

Ethical dilemmas arise from conflict, and it requires skill and understanding to make the most appropriate and ethical decision in the circumstances and which is in the best interest of the consumer.

However, in such a complex industry, there could be two or more values that oppose each other, such as ‘openness’ and ‘confidentiality’, and there could also be values that need to be priorities where both cannot be achieved – it is about weighing loyalties against personal interests.

Explain what is meant by the term ‘ethics code’.

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As it is difficult to evaluate ethics in isolation, it is often necessary to consider such factors as persistency of problems and complaints or the outcomes of ethical behaviours.

Management information (MI)

Management information (MI) is information that is collected during a particular period of business activity, for management to be able to make good decisions. It is the principle business tool for evaluating on a regular basis a firm’s business processes from an ethical point of view. MI helps to identify ethics-related risks to be addressed or ethical objectives to be achieved, understand the desired outputs for those objectives to be achieved, and identify the qualitative and quantitative measures that help to measure those outputs.

The following data can be collected as useful management information.

Lapses and cancellations - this information can provide evidence of trends in the types of products being sold, evidenced from new business registers and data from product providers, and helps to ensure the fair treatment of customers

Complaint volumes – the number of complaints gives valuable information, but establishing the root cause helps to identify products and processes that are causing concern

File reviews enable the standard of paperwork to be assessed before, during and after advice has been given, and any problems to be addressed

Business mix – the spread and concentration of products and providers helps to prove whether a whole of market approach is consistently being applied

Other...

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...ilable to generic markets across a wide range of distribution channels, and that gives equal prominence to all of its features, may be behaving compliantly but not necessarily ethically. A firm that targets specific markets with only products that are relevant to that group of individuals and only through appropriate distribution channels, and that gives prominence to those features/terms that are the most important and that help consumers make informed decisions, is more likely to achieve ethical outcomes.

In respect of complaints – a firm that treats all complaints in a standard format within standard prescribed time limits dictated by the regulations may be acting compliantly, but a firm that strives to exceed those expectations is more likely to achieve customer satisfaction.

In respect of marketing – the inclusion of an abundance of technical information and jargon may give a firm peace of mind that it has covered itself in respect of disclosure and disclaimers. However, if more consideration is given to the overall presentation of marketing material, with the use of plain language, limited jargon, easy to read fonts and the confidence to place non-sales information in the most appropriate place, rather than on the back pages; this approach is less likely to lead to confusion and is a more ethical approach to communicating with consumers.

List the four key factors that the regulator believes are essential for MI to be beneficial in relation to the fair treatment of customers.

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Developing and embedding an ethical culture in a sector or specific firm depends upon continuous feedback from stakeholder groups, which include:

Customers

Regulators

Employees

Partners/networks/sector contacts

Stakeholders and Corporate Social Responsibility (CSR)

The rule of fairness must apply to all. Anyone who is affected by the firm or could themselves affect the company is a stakeholder. It is through engaging with stakeholders that a company can learn how well it is doing. At the same time, this engagement gives the company the opportunity to explain issues and trends that are important to how the business must operate. Engaging in this way is called Corporate Social Responsibility (CSR).

Consider this - without cl...

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...g improvements on key issues

Implement improvements and monitor progress

Over time, communicate with those key stakeholders about how you are doing on those key issues

Every so often, have someone check that your CSR programme is working as you would like it to

Tell people about how your business has improved because of its CSR programme

Larger firms should expect to undertake each of these steps; smaller firms may wish to focus on crucial steps such as 3, 7, 8, 9 and 10 above, focusing on one issue each for customers, employees, the environment and communities.

 

The regulator has provided guidance on MI relating to the fair treatment of customers, based on four principles. What are they?

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This revision test (opens in a new window) has 8 questions and ...

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...y time 3 hours

5 standard multiple choice questions in the R01 exam.